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The Peter Principle: Promotions and Declining Productivity

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  • Edward P. Lazear

Abstract

Many have observed that individuals perform worse after having received a promotion. The most famous statement of the idea is the Peter Principle, which states that people are promoted to their level of incompetence. There are a number of possible explanations. Two are explored. The most traditional is that the prospect of promotion provides incentives which vanish after the promotion has been granted; thus, tenured faculty slack off. Another is that output as a statistical matter is expected to fall. Being promoted is evidence that a standard has been met. Regression to the mean implies that future productivity will decline on average. Firms optimally account for the regression bias in making promotion decisions, but the effect is never eliminated. Both explanations are analyzed. The statistical point always holds; the slacking off story holds only under certain compensation structures.

Suggested Citation

  • Edward P. Lazear, 2001. "The Peter Principle: Promotions and Declining Productivity," NBER Working Papers 8094, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:8094
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    References listed on IDEAS

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    1. Robert Gibbons & Michael Waldman, 1999. "A Theory of Wage and Promotion Dynamics Inside Firms," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(4), pages 1321-1358.
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    3. Joao Ricardo Faria, 2000. "An Economic Analysis of the Peter and Dilbert Principles," Working Paper Series 101, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    4. Anderson, Ralph E. & Dubinsky, Alan J. & Mehta, Rajiv, 1999. "Sales managers: Marketing's best example of the peter principle?," Business Horizons, Elsevier, vol. 42(1), pages 19-26.
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    Cited by:

    1. LLUIS, Stéphanie, 2001. "Wage Policy of Firms: an Empirical Investigation," Cahiers de recherche 2001-18, Universite de Montreal, Departement de sciences economiques.
    2. Robert Gibbons & Michael Waldman, 2006. "Enriching a Theory of Wage and Promotion Dynamics inside Firms," Journal of Labor Economics, University of Chicago Press, vol. 24(1), pages 59-108, January.
    3. Gennetian, Lisa A. & Sciandra, Matthew & Sanbonmatsu, Lisa & Ludwig, Jens & Katz, Lawrence F. & Duncan, Greg J. & Kling, Jeffrey R. & Kessler, Ronald, 2012. "The Long-Term Effects of Moving to Opportunity on Youth Outcomes," Scholarly Articles 33950779, Harvard University Department of Economics.
    4. Eric, Van den Steen, 2002. "Skill or Luck? Biases of Rational Agents," Working papers 4255-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
    5. Hvide, Hans K. & Kaplan, Todd, 2003. "Delegated Job Design," CEPR Discussion Papers 3907, C.E.P.R. Discussion Papers.
    6. Hans K. Hvide & Tore Leite, 2003. "A Theory of Capital Structure with Strategic Defaults and Priority Violations," Finance 0311003, University Library of Munich, Germany.
    7. Stephanie Lluis, 2005. "The Role of Comparative Advantage and Learning in Wage Dynamics and Intrafirm Mobility: Evidence from Germany," Journal of Labor Economics, University of Chicago Press, vol. 23(4), pages 725-768, October.
    8. Ariga, Kenn, 2006. "Horizontal transfer, vertical promotion, and evolution of firm organization," Journal of the Japanese and International Economies, Elsevier, vol. 20(1), pages 20-49, March.
    9. Malgorzata Sulimierska, 2014. "Effectiveness of capital control, economic growth and animal spirit: A cross-country analysis," Working Paper Series 7014, Department of Economics, University of Sussex Business School.
    10. Pawel Sobkowicz, 2010. "Dilbert-Peter Model of Organization Effectiveness: Computer Simulations," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 13(4), pages 1-4.

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    More about this item

    JEL classification:

    • J00 - Labor and Demographic Economics - - General - - - General
    • J6 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers

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